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The Enduring Advisory Firm

The advisory firm of the future is building a business based on tomorrow’s clients and employees

The last three years were about surviving the here and now. But what about the long-term health of your advisory firm? Now that the economy and markets have started to recover, every advisor should consider how their current decisions will impact the future of their business. What does it take to build a business that will last?

To embark on a positive course, begin with the destination in mind. Ask yourself these important questions: How old will I be in 10 years? What do I want my business to look like at that point? What will be my role, if any? What will our clients look like? What will our employees look like? Who will be leading the business? Who will own the business? What do I want out of the business?

Defining an enduring firm

An enduring advisory firm has five key qualities:

Consistent profitability

Transferable value

Loyal clients

Career growth for employees

Multigenerational client appeal

The metrics for these characteristics are unique to each business model, but these basic guideposts should steer all firm owners.

For example, an advisory firm that consistently generates a gross profit margin in the 60% range and an operating profit margin in the 25% range would be in the upper quartile of advisory firms globally. Gross margins are impacted by pricing, productivity, service mix and client mix. Operating margins are impacted by revenue volume and cost control. The top performing firms actively manage these six profitability levers to produce better results than the average advisory business. Meanwhile, the average firm achieves mediocrity by letting profits be determined by fate.

Advisory firms that can demonstrate how such profitability could be sustained if the business were sold will also command a higher multiple, but they will justify a higher value based on cash flow alone [Value = Cash Flow ÷ (Risk – Growth)]. Clearly, leaders of advisory firms should use valuation principles to actively manage their businesses. Create a decision-making filter based on increasing cash flow, minimizing risk and uncertainty and positioning for growth. If you build a business to last, you will always have a valuable business to sell.

Advisory firms that value their clients and their employees equally also tend to endure. Ask the same questions for each constituency: What causes them to come to your firm and what causes them to stay? Loyalty is different from fealty; people become passionate about supporting the firm when they truly believe in what they are doing. One of my favorite quotes from Ayn Rand’s classic novel “Atlas Shrugged” states, “It is not your obedience we seek, but your commitment.” Advisors who do things only because they are required rather than because they are right for clients or employees build an unstable foundation for their business.

Client loyalty can be measured in the number of referrals they bring to your firm, the types of issues they rely on you to help them with and the amount of assets they trust you to manage. What clients say about you when talking to their friends, relatives and centers of influence is very revealing. Having a process in place to validate loyal behavior and measure the quality of your service experience can be a dynamic management tool.

The same is true for measuring employee loyalty. While individuals each have a unique relationship with their employer, the big question is whether they would recommend friends to seek employment at your firm and whether they would recommend relatives to use the firm for the management of their wealth. Being an advocate for the firm depends on whether employees are fulfilled in their job, proud of what the firm does and how it does it and satisfied that the rewards are competitive with the market and include the opportunity for career growth.

The enduring advisory firm must also be properly positioned for future growth. Unfortunately, many advisors who have been force-fed data from consultants, researchers and trade publications have come to believe that the world will end when the last baby boomer dies. Today’s advisors, broker-dealers and custodians have heavily invested in solutions for boomers and have geared their messaging and delivery toward this constituency. Within the not-too-distant future, most boomers will have shifted from the accumulation phase to the withdrawal phase. When an advisor’s practice is overweighted with retirees, they must work harder to replace lost assets each year.

The issue is not just about trying to find more accumulators. It is about creating an approach to the market and a service experience that is relevant to those doing the accumulating. As Cam Marston of Generational Insights explains, “Boomers want you to show that you are interested in them. They want you to ask questions, get to know one another and determine if you’ll enjoy working with each other. On the other hand, Gen X and Millennials want you to prove that you’re good, to prove you know what you’re doing. They want to have a quick, thorough and efficient transaction. After you’ve proven this, then they may want to get to know you better.”

If your business model was built to serve a generation that is impressed by plaques, degrees, certifications and dark panelled walls, how is the generation that communicates by text messages and measures you by current knowledge and real-time results going to view you? Further, what if the advisor they are engaged with is likely to die or retire long before they reach their peak earnings? Why would they commit to an enterprise that has no awareness of the mortality of its professional staff?

Impediments to building an enduring business

Most advisors recognize the need to hire good talent, execute a succession plan and grow their business around inheritors and creators of new wealth. Yet for many, the pre-retiree and post-retiree markets have been a boon, and there are still legs in this market with an estimated 10,000 people retiring each day for the next 10 years. But like political leaders who fail to recognize that natural resources are finite, advisors who fail to recognize they have a portfolio of depleted oil wells in the form of retired clients will not have a business that outlasts them. Of course, it may not matter.

But for those who do care, it’s helpful to understand what impedes them from building an enduring business.

The first roadblock is an over-reliance on one or a few people for generating new clients, directing investment decisions or managing relationships. The principle of diversification applies to managing a business as it does to managing a portfolio. Heavy dependency on a single asset is an unconscionable risk.

Second is the failure to create a true vision for the business. This is not about the elevator pitch, but about what an owner wants the business to be known for. Knowing where you are going and what you have helps to close the gaps and make achievement of the vision possible.

Third is the reluctance to sacrifice short-term benefits for long-term gain. No matter one’s revenue model, people in professional services are addicted to current income. It is a score that one hates to see decline.

The fourth impediment is inertia, or more specifically, a lack of motivation to alter what is currently working. How many times do we hear ourselves saying, “If it ain’t broke, don’t fix it.” This attitude explains the fate of once formidable companies like Sears, Yahoo and Arthur Anderson.

Finally, most advisors run small businesses with little commitment to professional management and lack the ability to translate ideas into action and strategies into results.

The good news for the business of financial advice: An emerging crop of enlightened leaders is transforming the way this business will look in the next decade. If you want to participate in this transformation or leave a strong and lasting legacy, take stock of what defines an enduring business and then take action to achieve this vision.

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